Taking Care of Business: Does It Cost Too Much?

By Sarah Stecker

Foreword

We gave money to the XYZ Company, and the XYZ Company hired people. Is the notion that the people were hired because of the money a case of economic principles playing out-or just pretzel logic? Is it real or is it politics? These are valid questions to ask about a largely hidden side of state spending.

It’s not about whether the State of New Jersey should invest in its economy and take steps to make sure this is a place offering opportunity. It’s about how. Increasingly, states have become enthralled by providing incentives in various and expanding forms to businesses that agree to move there or, if already there, to remain. These business incentives are given not only in the absence of evidence that they really work, but in the face of growing evidence that they do not-or at least that they are only of marginal importance to businesses’ decision as to where to locate.

Maybe the best way to build an economic climate hospitable to business and job-creation is the old-fashioned way: fully investing in areas like schools, colleges, job training, transportation infrastructure and environmental protection. Such spending has a proven record of success. But it is hard to measure. So, elected officials find it useful to point to specific programs as a way to tally how many people have been hired during their term. But if “job creation” is a way to tout the accomplishments of an officeholder by using statistics that are hard to refute (the jobs were created; it just isn’t clear how much incentives really mattered), then there is a need to change this climate.

As matters stand, reforms in the practices that this report details are unlikely to occur. When it comes to offering bounties for businesses, no state will unilaterally disarm. Nor will sound economics win out when, even though they are defended on economic grounds, the proliferation of business incentives is essentially a political matter. Excellent work is being conducted around the country to help bring the necessary climactic change. We hope this report will help spur discussion and action in New Jersey as well. Our citizens need the tools to get involved in deciding how a growing share of their taxes is be spent.

People can make a difference. According to a recent study in Minnesota, which passed the nation’s first economic development accountability law in 1995, more accountability in business incentive policies has led to heightened civic engagement and, not surprisingly, higher standards.1

There is strong reason to believe that the Business Employment Incentive Program discussed in this report, as well as other incentives, may not be the wisest use of tax dollars. But to recommend termination of such programs based on current knowledge of their cost effectiveness or how efficiently they allocate resources would be as unsound from a policy standpoint as calling for their continuation or expansion. Not enough is known, and that is the point. It is in the interest of policy makers and taxpayers alike to find out whether the money now given to businesses through various incentives and tax breaks could better help the economy in the long run if spent in other ways. The recommendations in this report are aimed at provoking debate that addresses these important issues.

We do not call upon New Jersey to be heroic; much of what is recommended on these pages reflects policy already enacted in other states. The strongest supporters of current policy should want these measures as much as the biggest skeptics. Indeed, if tax dollars are the lure they are touted to be, no one loses by shining a spotlight on the process-disclosing, monitoring, auditing and evaluating who gets what, and what the state gets in return. And if they are not, we need to know that too. The large and growing state investment in incentives for businesses is too important to be taken on faith.

NJPP thanks Policy Analyst Sarah Stecker for the thorough work that went into Taking Care of Business. Senior Policy Analyst Mary E. Forsberg’s assistance was indispensable and Jeanne Weber provided valuable help in digging up data and documents. Input from Greg LeRoy, Executive Director of Washington-based Good Jobs First, as well as from researchers in several states, helped us to develop a context for this issue outside New Jersey. New Jersey Future helped in evaluating the BEIP program in terms of land-use policies. We appreciate the time taken by Caren Franzini, Rose Smith and Dominick DeMarco of the New Jersey Economic Development Authority to explain the workings of BEIP.

We deeply appreciate a grant from The Stern Family Fund that made this report possible.